Buy rather than Rent...
Category Buying & Selling Tips
If you’re young and have been heeding the personal finance advice about how owning a home doesn’t make financial sense anymore, Jonathan Broekman says that it’s time to revisit your thinking.
Buying a house, especially while young, is still an incredibly smart decision.
To understand why the “smart” financial columnists telling you to rent rather than buy are wrong, we have to take a look at the facts.
Avoid short-term thinking
Even if examine a scenario that assumes the worst about home ownership and the best for long-term renting, home ownership still comes out ahead.
But first, we have to ask an important question:
If the long-standing conventional wisdom has been that owning a home is a good financial move, then why, suddenly, have we decided it isn’t anymore?
The answer is one of perspective.
We no longer take truly long-term views for our future, and we optimize our lives for small but instant gratification instead of big wins in the future. And all the financial writers trying to gather eyeballs for their work know this and cater to it.
Even though the reality is owning a home will probably save you hundreds of thousands over your entire life—one of the smartest financial moves you can make—the advice we see everywhere now doesn’t account for this because no one seems to care what their life will be like more than a few years from now.
The lifetime cost of renting vs. owning
Barclays recently completed research stating that young people locked out of home ownership will spend nearly £200,000 extra over a lifetime of renting rather than buying a house, with researchers stating that this figure is a conservative estimate and does not factor in high inflation or resale value.
Barclays' calculations showed that the costs of buying, paying the mortgage on and maintaining an average home valued at about £160,000 today will total £429,000 over 50 years, where a tenant would typically pay £623,000 in rent for a similar property over that time.
And the argument for owning only gets stronger when you consider these three things:
Consider the value of the house at the end of life. Maybe in your last few years you decide to move in with your kids. If the house didn’t appreciate at all in 55 years, which is highly improbable, you’d still be able to sell it for the original purchase price, which would leave you well ahead of the penniless option of renting.
This model completely ignores inflation. Every year you own your home, it gets cheaper to live there. The opposite is true when you rent - this tilts the scale towards ownership astronomically more.
Buying younger and living longer means even more money in your pocket, as every year of ownership adds to your advantage.
6 reasons you still think renting is better, but isn’t…
We debunk the most popular pro-renting arguments:
1. You don’t want to be “tied down” to a bond
This is a short-sighted argument, and it’s steeped in the limiting belief that somehow, if you own a home, you’ve signed up for a lifetime of servitude, never to venture beyond your property line again due to the financial commitment and overwhelming amount of back-breaking labor that comes with owning a home.
Even if you want to travel, and free yourself up from monthly repayments, then rent your house out and have someone else pay the bond while you’re away.
If you rent, that’s what you’re doing for your landlord now.
If being a landlord is too much work, hire a property management company to run the place. All you have to do is collect rent.
2. It’s cheaper to rent where you live
Perhaps for now, but as a renter, you’ll be blessed to see cycles of rents lower than bonds and cursed to live through the opposite over the course of your life, and it will probably switch several times. But in the long run it evens out, and rent will always average higher than ownership due to the need for a profit motive for those taking the “risk” to own.
3. Renting avoids the burden of paying taxes and interest, maintenance, etc.
The truth is that if you rent you are already paying all those things for your landlord! They’re wrapped up into one monthly check for your convenience AND you add some extra for the landlord’s pocket. Renters cover the full cost of home ownership and then some, or there would be no such thing as a rental.
4. Houses are bad investments
Actually, you can’t make a better return elsewhere. Not because you aren’t a prudent investor, but because as a renter we’ve proved that you won’t save any extra money over the course of your life to invest in the first place.
“And even if you could,” says Jonathan, “remember that you cannot live in an investment share - you will always need a roof over your head and somewhere to call home! It’s money you’re spending anyway, so put it somewhere wise.”
5. Your rent is low because you have roommates and you couldn’t buy a place and do the same
You’re not comparing apples to apples. Right now, you might not be able to buy the house you have that allows you live this lifestyle, but keep saving your pennies, and soon you will. Having roommates pay most - or all! - of your rent is smart. Having them pay your bond is even smarter.
6. It’s not a good time to buy
Sometimes interest rates are high, and sometimes they’re low, but this is short-term thinking. Instead, focus on getting a well priced home. You can re-finance your bond if better rates become available, but you are only going to get one shot at getting the right price, and the right house.
If you can snag a well-priced home when rates are low, that’s great, but don’t base your entire buy vs. rent strategy on interest rates.
It’s not that property naysayers are completely wrong, but that their focus is too short-term. The longterm benefits and investment on the property ladder is proven, and as Jonathan says… “you always need to live somewhere”!
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Author: Georgina Roberts
